Roth IRA Rules & Restrictions

By M.J. Kelly

Overview

Saving for retirement is smart and taxpayers have many choices when it comes to putting money aside for the future. The Roth IRA (individual retirement account) makes a lot of sense for persons with earned income because it combines a method of saving with the advantage of tax-free withdrawals. Learn the rules that apply to the Roth IRA to see if you qualify for this tax-sheltered retirement program.

History

As a means for taxpayers to save for their own retirement and supplement social security, the Roth IRA was established as part of the Tax Relief Act of 1997. Senator William Roth, of Delaware recognized that citizens would benefit from putting a portion of their income into tax-sheltered accounts that would grow over time.

Function

Set up your Roth IRA at your bank, with an insurance company or with an investment broker. Initial investments may be as low as $250. You may contribute to your Roth either on a regular basis or make a lump sum deposit for your full allowable contribution. You have until April 15 of next year to make your Roth contributions for this year.

Identification

Fund a Roth IRA with earned income that has already been taxed. Your contributions and their earnings grow tax free. In contrast to contributions made to a traditional IRA, Roth contributions are not tax deductible. Taxpayers who expect to be in a high tax bracket when they retire can benefit from investing in a Roth since there are generally no taxes due on withdrawals.

Features

There are income restrictions on contributions to a Roth IRA. If your adjusted gross income is more than $101,000, and you are single, your allowable contribution begins to decrease and is eliminated when your income reaches $116,000. If you file jointly with your spouse, your income cannot be higher than $169,000 for you to qualify to contribute to a Roth.

Considerations

The maximum contribution to a Roth IRA is $5000 if you are under 49 years of age. You may add $1000 more if you are 50 years old or older. Usually, you must be 59 ½ years old to withdraw from your Roth without penalty. You may, however, make withdrawals earlier if you use the funds for purchases such as buying a first home or paying for higher education.

Benefits

If you have a 401k plan at work, you are still eligible to invest in a Roth IRA. The rules for a Roth allow you to continue to contribute to your IRA after age 70 ½. Because you are exempt from taking minimum distributions at age 70 ½, funds in your Roth IRA may grow, tax free, indefinitely.